Annual bar and coin demand was broadly stable at 1,029.2 tonnes, helped by a Q4 recovery from a very weak Q3, and taking the quartely demand back to 2013 levels.

Source: Metals Focus; World Gold Council

The World Gold Council is talking up the overall 2016 changes. But shifts in the final quarter of 2016 undermine their story.

Yes, demand by retail investors for coins and bars did pick up in Q4, but it languished at unusually low levels for most of the year.

Yes, annual demand by exchange traded funds (ETFs) was higher in 2016 than 2015, but these same ETFs bailed out of the yellow metal in the December quarter in a big way.

And these is no hiding from the lackluster jewellery demand. 2016 brought a 7-year low for this segment. Rising prices for much of the year, regulatory and fiscal hurdles in India and China’s “softening economy” were key reasons for weakness in the sector.

India’s shock demonetisation policy brought the market to a virtual standstill. An initial rush for gold following the policy announcement came to a swift halt in the ensuing cash crunch. This is exactly the sort of regulatory shock you might have thought would raise demand for gold, but in fact the opposite happened. It is an event that has undermined a key reason why investors thought they should buy and hold gold.

Nor is there any hiding from declining central bank demand. It has been a favourite acquisition by bully states (Russia, other ex-Soviet states, some Arab states), but even they now show disenchantment with gold’s store-of-value possibilities. They may still be net buyers but they bought a massive one third less in 2016 than 2015. And investors need to be wary when about 10% of the demand underpinning the price is determined by such dodgy sources. Despite this, 2016 was the 7th consecutive year of net purchases by central banks.

The gold price ended the year up +8% in both US dollars and New Zealand currenmcy. Having risen by an impressive +25% by the end of September, gold relinquished most of those gains in Q4 following Trump’s election win and the FOMC’s interest rate rise.

However, that +8% rise needs to be seen in the context of an unusually low starting point. See the chart below. In fact, for most of 2015 it traded at levels much higher than where it ended in 2016.

Here are the long run global gold demand charts (in tonnes):

On the supply side, things were not much better.

Mine production was down. Scrap sources were lower too. You would think lower supply would have supported prices in a fundamental way. Perhaps they did, but it was demand factors that seemed to drive pricing more than restrained supply.

The reaction of gold demand in India, and international prices, to their demonetisation policy is perhaps the most interesting and surprising event of 2016. And one that will worry gold bugs because it shows gold is not ‘money’ in a crisis; it is just another commodity.